Dialogue: Higher pay the key to saving

By BRIAN FALLOW

Does New Zealand have a savings problem?

Finance Minister Michael Cullen, father of the NZ Superannuation Fund, seems to think so.

And Reserve Bank Governor Don Brash, in a speech last month, voiced concern that household finances were too low for comfort.

But WestpacTrust chief economist Adrian Orr says incomes, not savings, are the problem.

To focus on savings is to mistake a symptom for the disease, says Mr Orr.

Policy should concentrate on raising income levels rather than savings, and on giving people clear incentives to invest in their own future.

One way of measuring household savings rates is the "flow" method based on the national accounts. It takes the household sector's income, deducts what it spends and calls what is left savings.

Or, in New Zealand's case, "dis-savings" - by this measure, households have been collectively spending more than they earn since the mid-1990s.

But Treasury economists Grant Scobie and Iris Claus point to a couple of difficulties with this way of measuring savings:

* The national accounts treat spending on education, health care and durables as consumption rather than investment, and so understate saving.

* Because this measure of saving is the difference between two very big numbers, errors in estimating income or consumption can make a big difference to the apparent savings rate.

The other way of measuring household saving is to look at changes in households' net wealth - their assets minus their liabilities.

This "stocks" method also underestimates savings, say Ms Claus and Dr Scobie.

For one thing, some home mortgages - between 10 and 20 per cent of them, banks estimate - are in effect loans to small businesses secured on the family home.

The data does not capture the net wealth in farms, or the value of household investment in businesses not priced through the sharemarket.

Even so, savings rates measured in household net-wealth terms are higher than as measured by the flows method, and have remained in positive territory.

Ms Claus and Dr Scobie say total net wealth, expressed as a percentage of disposable income, has grown modestly over time.

"Total net wealth increased from around 350 per cent of disposable income in 1979 to about 400 per cent in 1999."

Financial (or non-housing) net wealth peaked at around 180 per cent of disposable income in the mid-1980s, but in contrast to other developed countries it has been falling since then and was below 100 per cent by the late 1990s.

In part, this reflects the sharemarket crash of 1987. Although rising, financial assets have not recovered to their 1986 peak.

But it also reflects the strong rise in household debt after the deregulation of financial markets in the late 1980s.

The housing boom of the mid-1990s pushed household net worth up relative to incomes, but from 1997 to 1999 it was falling again.

WestpacTrust's household savings indicators show that household net worth has continued to decline since then.

The proportion of households owning their own home fell from 73.5 per cent in the 1986 and 1991 censuses to 70.1 per cent in 1996, back where it was in the mid-1970s.

That remains in line with other English-speaking developed countries.

But New Zealand households carry a higher level of mortgage debt, relative to incomes: 114 per cent compared with 70 per cent in the United States and 78 per cent in Australia.

The net effect is that since the mid-1980s, New Zealand households' net wealth has remained relatively steady at about four times disposable incomes. That contrasts with the rising trends, from similar or higher starting points, in Australia, the United States, Canada and Britain.

Mr Orr says comparison of households' financial vulnerability over time or across countries has to take account of services the Government provides for retirement income, health care and education.

The tax that pays for these services can be regarded as a form of compulsory saving. As well, individuals invest directly in their own education, which has caused the stock of human capital to rise strongly in the past few decades.

Mr Orr says a wide definition of savings, taking account of those factors, would make New Zealand's household savings performance look more comfortable and comparable to other countries.

"If we believe there is a savings crisis in New Zealand, then we are really suggesting that many of the services provided and promised us by the Government are either substandard or unsustainable."

He says the prompts people are getting to invest in their own futures - to save - are still muddled.

"It is no use the Government saying, 'You all have to save more,' and in the next breath, 'But don't worry about health, welfare and retirement income. We've got it covered'."

T HE best way of raising savings is to raise incomes, says Mr Orr.

"The issue is how you raise our low per capita income. All the rest will follow."

That requires getting the gamut of Government policy right, he says - not just retirement income, but taxation, education and the many forms of social insurance.

Instead, Mr Orr says, New Zealand is stuck with half-baked economic policies that bring transition costs but little overall change in behaviour or outcomes.

"As Dr Brash notes, although Government has become less generous in its offerings, little has changed in terms of individual behaviour.

"The wider population is either unaware or unconvinced that this is the case, with household investment decisions stuck in a decade-long policy tea break."

In particular, Mr Orr believes Dr Cullen's superannuation fund falls into the "moral hazard" trap.

Moral hazard is where policymakers, seeking to assure people that some bad future contingency is insured against, perversely encourage people to take the risks that make it more likely.

Mr Orr rejects Dr Brash's concerns about financial vulnerability arising from households' appetite for debt and concentration on housing assets.

"To get het up about financial vulnerability, Dr Brash is forced to muse about what would happen if all baby-boomers lost their lust for housing.

"Of course, by definition house prices would be weaker and the current, conservative loan-to-asset ratios in banks would deteriorate. But is this highly likely or imminent?"

As Dr Brash notes, the wider policy environment still encourages smooth net inflows of foreign capital, Mr Orr says.

"New Zealand has an open capital market, a stable macro-economic environment, stable inflation, manageable levels of Government debt, almost 100 per cent hedging of its foreign exchange exposure and a floating exchange rate."

Throw in political stability and other desirable structural governance features and the formula is a winner, says Mr Orr.

Persistent balance of payments deficits and their cumulative effect, high levels of overseas liabilities, are not necessarily a problem, either.

Canada and Australia also have high levels of net foreign liabilities.

At the other end of the spectrum, wealthy capital-exporting countries such as Japan and Switzerland have had very low GDP growth rates over the past 10 years.